The IRS Said the Tax Was Paid Late. It Wasn't.
The IRS told our client the tax was paid late. It wasn't. The tax had been paid years earlier through FIRPTA withholding, and the entire six-figure penalty came down to the IRS using the wrong payment date.
The IRS Said the Tax Was Paid Late. It Wasn't.
Most taxpayers assume an IRS penalty notice means they did something wrong. Not always.
We recently assisted a Canadian-owned entity that sold US real estate. As required under the Foreign Investment in Real Property Tax Act (FIRPTA), several million dollars of tax was withheld from the sale proceeds and remitted directly to the IRS at closing. That withholding exceeded the taxpayer's ultimate US income tax liability, so the taxpayer was actually owed a refund.
How FIRPTA Withholding Works
When a foreign person sells US real estate, FIRPTA withholding rules generally require the buyer to withhold a portion of the sale proceeds and send it directly to the IRS at closing, often months or years before the seller files a US return. When the return is filed, the seller claims credit for that withholding and either pays any remaining tax or receives a refund of the excess. That is exactly what should have happened here.
The IRS Demanded the Full Tax First
The first notice ignored the withholding entirely. The IRS billed the taxpayer for the full tax, plus penalties and interest, as if nothing had been paid at all, even though the multi-million-dollar tax had already been withheld and remitted at closing.
A Refund Arrived, But the Penalty Didn't Go Away
After extended correspondence, the IRS credited the withholding and issued a multi-million-dollar refund. At first glance, the matter appeared resolved.
A careful reconciliation told a different story. The refund was materially short of what was expected, and the shortfall matched a six-figure estimated tax penalty the IRS had assessed. The IRS had credited the payment but still treated it as though it had arrived late, so the penalty remained on the account.
The Sticking Point: A Stamped Form 8288-A
To finish crediting the withholding correctly, the IRS wanted a stamped copy of Form 8288-A, Copy B, the IRS-validated proof of the FIRPTA withholding. We obtained the stamped copy, submitted it, and paired it with the account history showing the tax had been paid at closing, not at the return due date.
How We Responded
We gathered and analyzed IRS account transcripts, notices, the stamped FIRPTA withholding documentation, prior correspondence, the return filings, and the payment and refund records.
The documentation established that the IRS had received the withholding years earlier, that the withholding exceeded the final tax liability, that the taxpayer had not underfunded its tax obligation, and that the penalty resulted entirely from the IRS applying the wrong payment date rather than from any actual failure to pay. We then submitted a detailed penalty relief request explaining why the penalty should never have been assessed.
The Result
The IRS agreed. The six-figure estimated tax penalty was removed in full, and the taxpayer received an additional refund. Start to finish, resolving the matter took more than a year of sustained follow-up with the IRS.
The Lesson for Taxpayers
Many people assume IRS penalties always mean the taxpayer failed to pay on time. In reality, penalties frequently arise from misapplied payments, incorrect payment dates, missing withholding credits, processing delays, and information-matching errors inside the IRS system.
Sometimes the taxpayer truly owes the penalty. Sometimes the IRS simply has the facts wrong. The difference can be financially significant.
Received an IRS Penalty Notice?
Before paying, it is worth confirming that all payments and credits were properly applied, that the IRS is using the correct payment date, that withholding was fully credited, and that the account transcript actually supports the assessment.
If you have received an IRS penalty notice, contact us for a review of your account. We can help you determine whether the penalty can be challenged and, if so, prepare the request for relief.
The IRS may send the bill. That doesn't mean the bill is correct.
Get a confidential penalty review consultation
This article is provided for general informational and marketing purposes only and does not constitute legal, tax, or accounting advice. Tax laws, deadlines, and penalty amounts change and depend on your specific facts and circumstances. You should not act or refrain from acting on the basis of this content without seeking advice from a qualified professional. Reading this article or contacting us does not create a client relationship.
Related posts
Exploring the ways in which virtual reality and artificial intelligence are shaping the future of game design, and how developers can take advantage of these technologies to create more immersive and interactive experiences.
Lorem ipsum dolor sit amet, consectetur adipisicing elit. Autem dolore, alias, numquam enim ab voluptate id quam harum ducimus cupiditate similique quisquam et deserunt, recusandae.
Lorem ipsum dolor sit amet, consectetur adipisicing elit. Autem dolore, alias, numquam enim ab voluptate id quam harum ducimus cupiditate similique quisquam et deserunt, recusandae.
Unfair IRS penalty? You have options.
Many people pay the penalty to make it stop, or send one letter and hope. There is a better route. Sometimes it is a phone call and knowing which IRS unit to call and when. Often it is a well-organized written request, clearly explaining and documenting the facts and legal authority, sent to the correct IRS campus.
The sooner we see the notice, the more options we usually have.
Free penalty notice reviewRoss Martin, JD, authorized to represent taxpayers before the IRS.
Past outcomes do not guarantee future results.
Can an IRS penalty be removed?
Often, yes. A penalty notice is an opening position, not a final assessment. There are four routes: proof that the return or payment was timely in the first place, the first-time waiver, reasonable cause, and statutory exceptions. More than one frequently applies to the same account, and the strongest is usually not the one most people reach for.
What we handle
Penalty Abatement
First-time abatement and reasonable cause requests, built on the right authority and backed by the right documentation.
The Right Request, the Right Way, the Right Place
A letter is not always the answer, and neither is a call. We match the request to the best medium and send it where that penalty is actually worked.
Misapplied Payments
When the IRS posts a payment to the wrong period or date and the interest keeps compounding, we guide the IRS through correcting the record.
Cross-Border and Withholding
FIRPTA and 1042 withholding, foreign asset reporting, and credits the IRS failed to match, tracked through to the refund.
How does the process work?
Tell us what the IRS sent and what happened. We review the notice and your transcripts, then tell you the fastest path, whether that is a documented abatement request, a correction to your account, or the right phone call to the right unit.
You are not committing to anything by asking. The first review tells you whether you have a case, and if there is no realistic path we will say so.
Who you will be working with
Ross Martin, JD, is an international tax consultant authorized to represent taxpayers before the IRS. His practice centers on cross-border consulting, compliance, and IRS controversy, including planning and structuring advice, penalty abatement, international information return filings, and correcting account errors that generate assessments on returns filed on time.
Dealing with the IRS can feel like a never-ending maze of false leads and dead ends. We have been through it enough times to know the way out.
- Authorized to represent taxpayers before the IRS
- Juris Doctor, Santa Clara University School of Law
- Cross-border consulting, compliance, withholding, and IRS controversy
- Connect on LinkedIn
Common questions
Can an IRS penalty actually be removed?
Often, yes. A notice is an opening position, not a final assessment. There are four routes: proof that the return or payment was timely in the first place, the first-time waiver, reasonable cause, and statutory exceptions. Which one fits depends on the penalty, the account history, and what the transcript actually shows.
What does the first review cost?
Nothing. Send the notice and a short summary of what happened. The review tells you whether there is a case worth pursuing and which route is the strongest. If there is no realistic path, we will say so.
What do you need from me to start?
The notice itself, including the notice number and date, and a short description of what happened. Account transcripts matter as much as the return, because they show the due date the IRS used and the transaction code that generated the penalty. We can request those once we are authorized.
How long does penalty abatement take?
It varies widely. A straightforward account correction can post within days. A first-time waiver may resolve quickly or may require a written request, depending on current IRS policies and procedure. A documented reasonable cause request submitted in writing generally takes months, and information return penalties take longer still. Anyone quoting a fixed timeline is guessing.
What if I already paid the penalty?
Payment does not forfeit the claim. You can request abatement and a refund of the amount paid, subject to the refund limitations in section 6511, generally three years from the date the return was filed or two years from the date of payment, whichever is later.
Can you help if my accountant already tried and was denied?
Frequently. Denials often turn on how the request was framed rather than on the underlying facts. Two examples come up repeatedly. A request that says the return was timely, but does not cite the provision that made it timely, reads to the IRS as a disagreement rather than a correction. A reasonable cause request sent without supporting documentation draws a form letter. A denial is also not always the end of the road.
Do you work with taxpayers and businesses outside the United States?
Yes. Cross-border matters are the core of the practice, including US citizens living abroad, foreign corporations with US filing obligations, and withholding and foreign asset reporting penalties. Deadlines for filers outside the United States are frequently misapplied by IRS systems, which is one of the most common sources of penalties on returns that were filed on time.
What does authorized to represent taxpayers before the IRS mean?
It means we can speak to the IRS on your behalf, obtain your account transcripts, and submit and negotiate requests directly, once you sign an authorization. It is not the same as legal representation in court, and this is a tax practice rather than a law firm.
Further reading
Send us your notice. We will tell you if it is fixable.
A short summary is enough to start. No cost, no obligation, and a straight answer on where you stand.
Send us your notice